How to divide a family business can be one of the most complex property issues in a California divorce. The business represents not only the livelihood of one or both parties, but often is a significant asset of the marriage.
Who Should Get the Business?
Usually, the party who actually runs the business is awarded it. During the pendency of the divorce, however, the spouse who runs the business (called the “in spouse”) may keep terrible income records or actually manage it poorly so that it appears less valuable. Such tactics could be considered a breach of fiduciary duty to the spouse who does not run the business (the “out spouse”). A good divorce attorney with the aid of a forensic accountant may be able to determine the value of such breaches and charge the breaching party with the resulting loss to the community, often by using an alternate valuation date to some time before the bad acts took place. There’s a moral in there somewhere.
Another issue that often comes up is when one party owned the business before marriage. If he or she did not have enough foresight to have the parties sign a prenuptial agreement assuring the business remains separate property, then some portion of the business will probably be owned by the community. This is because the labor of the parties during marriage is considered to be a community asset. It can be a complicated analysis to determine the separate property versus community property interests in a business. Generally parties seek the help of forensic accountants to do this.
If one spouse gets the business, the other spouse will be awarded the value of half of the community’s interest in the business. Often businesses are quite valuable and a large marital asset, such as the family residence, could be used to offset the value on the marital balance sheet to make the property division a fair one. If there are not sufficient assets, then often the equalization payment can be financed and appropriately secured.
Sometimes both spouses are equally involved in the business. If they are fortunate enough to be able to continue to work together amicably without damaging the business, then they may opt to continue to work together after the divorce. They would simply continue to be business partners (and still owe each other the duties business partners owe each other). Alternately, one spouse may wish to buy out the other spouse for a fair price. If no agreements can be made, then the decision will be left up to the court, who may decide to award it to one spouse entirely or to sell the business and divide the value equitably.
How Do You Know What the Business is Worth?
Valuing a family business in a divorce is another difficult issue. If there is enough money available, the spouses usually use a forensic accountant who will go through the business accounting records, banking records, and tax returns for a certain time period and then make an opinion as an expert as to what the value is. Often there is a cash flow analysis done, which may be used to help determine alimony and child support issues that may exist between the parties. If a forensic accountant cannot be utilized for some reason, then business brokers or the parties themselves may give evidence as to the value of the business. Obviously the Court may be inclined to be a little skeptical of any opinions of value a party might offer without substantial corroboration from the business records.
Can You Mediate the Division of a Family Business?
If the parties have sufficient knowledge of the value and cash flow of the family business, it is possible to mediate a fair property division and support order. Often businesses that both parties agree have little value are no obstacle to mediating a fair property division. Sometimes a family business is little more than a job that one party owns. One approach may be to use a forensic accountant in the mediation. Although forensic accountants typically work with divorce lawyers in litigating issues of value and cash flow, there is no reason the parties cannot retain a joint forensic accountant to investigate the business and determine its value and cash flow and then use the valuation report in their own negotiations. A forensic investigation of a business, however, usually takes a considerable amount of time and the divorce mediation may be “on hold” with the parties unable to finalize the property division in their divorce until the report is complete. If parties choose this approach, they may be able to make temporary agreements about support or any other issue while waiting for the valuation report and negotiating a final resolution of their divorce.